Our topic on this episode of the Ready for Retirement podcast is about whether or not you should invest all at once (lump-sum) or invest smaller amounts over a longer period of time (dollar-cost averaging).
Questions answered: Should I invest when the market is at all-time highs? When is the best time to invest? What is the best approach for my individual situation? Should I gradually invest to decrease risk?
Are you ready to start focusing on the things that truly matter when it comes to your financial future?
Key Points
- Before discussing what makes the most sense, let’s clearly outline what does not make sense to do.
- It’s most tempting to wait for the market to go down.
- One risk of taking this approach is that the market doesn’t drop for a large period of time and you miss out on significant gains.
- Another risk is that you don’t actually invest. If the market drops, individuals often don’t invest because they tell themselves they’ll invest when it rises back up.
- Market timing is extremely difficult and often causes investors to miss out on gains while the market continues to fluctuate.
- It’s most tempting to wait for the market to go down.
- Lump-Sum Advantages
- Exposure to the markets as soon as you invest.
- You’re able to capture returns for more days and receive a higher return.
- The best days, historically, happen amidst incredible uncertainty.
- Higher probability of making money over time and losing money over time.
- Lump-Sum Disadvantages
- You may be investing when the price is high and a setback is near.
- If we could predict when this would happen, this would be a simple decision.
- Since we can’t predict this, it’s about understanding what you’re hoping to accomplish and the risk involved with doing so.
- Dollar-Cost Averaging Advantages
- DCA (Dollar-Cost Averaging) includes investing on a monthly, bi-weekly, semi-annually, quarterly, any given timeline on a consistent basis.
- DCA decreases your risk in the short-term.
- Dollar-Cost Averaging Disadvantages
- DCA decreases your returns in the short-term, as your funds are growing by a smaller amount than if you had invested a large amount initially.
- The market doesn’t regularly decrease.
- DCA involves intentionally keeping funds on the sideline, which decreases your return potential over time.
- Higher probability of making less money over time and losing less money over time.
- Vanguard Study
- Vanguard conducted a study that found investing your money all at once increased your returns on an annual basis by ~1.5 to 2% more than if you were to DCA.
- This research doesn’t look into the risk involved with doing so.
- Investing by lump-sum could mean your funds are down at any given point much further than if you had DCA in, but are more likely to grow over the long-term.
- Why are you investing?
- Ex: Is it better to invest in my IRA all at once or spread it out?
- You may be doing this every year for several years and by investing all at once, the probability of returns shows that your greatest chance of return is by investing all at once.
- Ex: What should I do if I am hoping to buy a home?
- If you have a short-term purchase coming up, it may make more sense to DCA to decrease your risk in the short-term.
- You may be willing to give up upside potential so that it doesn’t force you to miss out on your goal.
- Ex: Is it better to invest in my IRA all at once or spread it out?
Timestamps
1:00 – Introduction to Lump-Sum vs. Dollar-Cost Averaging
2:00 – What Not To Focus On
3:29 – Lump-Sum Advantages
5:45 – Lump-Sum Disadvantages
7:45- Dollar-Cost Averaging Advantages
9:00 – Dollar-Cost Averaging Disadvantages
9:30 – Align Your Financial Goals With Your Portfolio
13:59 – Aligning Your Investments with Your Goals
15:00 – Overview
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